ECONandBIZ.com Chris Freeman B.Sc.ECON PGCE, Head of Economics & Business Studies, St Christopher’s School, Kingdom of Bahrain AQA AS Economics AQA Chapter 11: The measurement of macroeconomic performance

ECONandBIZ.com Chris Freeman B.Sc.ECON PGCE, Head of Economics & Business Studies, St Christopher’s School, Kingdom of Bahrain Measures of Economic Performance Economic Measures: – Inflation – Unemployment – Growth – Balance of Payments Other measures: – Quality of Life – Environment – Health – Education – Exchange Rate – Taxation – Income and wealth equality THESE 4 ARE THE MAIN ONES!!!

ECONandBIZ.com Chris Freeman B.Sc.ECON PGCE, Head of Economics & Business Studies, St Christopher’s School, Kingdom of Bahrain Measuring Economic Growth (GDP) Gross Domestic Product: – The value of output of goods and services produced in the UK during one year – Primary, secondary and tertiary sectors – Real versus nominal output – Can be viewed as being national income, national output or aggregate demand (AD) – GDP per capita: GDP divided by the population (GDP per head) GNP, GNY & GNP Positive and negative output gaps

ECONandBIZ.com Chris Freeman B.Sc.ECON PGCE, Head of Economics & Business Studies, St Christopher’s School, Kingdom of Bahrain Economic Growth on a Keynesian LRAS/AD Class Task: Complete the diagram

ECONandBIZ.com Chris Freeman B.Sc.ECON PGCE, Head of Economics & Business Studies, St Christopher’s School, Kingdom of Bahrain Types of Economic Growth (GDP) Potential Growth – the overall capacity of the economy (i.e. what the economy could produce if it used all its resources) Actual Growth – the annual percentage increase in output Nominal Growth – the growth in output not including any adjustment for price changes expressed as ‘current prices’ (the price reigning at the time of the measurement) Real Growth – growth in GDP adjusted to take account of changes in the price level – expressed as ‘constant prices’.

ECONandBIZ.com Chris Freeman B.Sc.ECON PGCE, Head of Economics & Business Studies, St Christopher’s School, Kingdom of Bahrain Where is the UK now? Growth (NY) Time Potential Growth Actual Growth Recession/Slump Growth/Upturn Boom/Overheating Decline/slowdown Trend Growth

ECONandBIZ.com Chris Freeman B.Sc.ECON PGCE, Head of Economics & Business Studies, St Christopher’s School, Kingdom of Bahrain How do we define Inflation A persistent rise in prices in an economy over a period of time Now measured by the HICP (CPI) Inflation does not fall – it slows down or speeds up! (If inflation in 2003 was 3% and in 2004 ends up being 2% it still means prices have risen by an average of 2% over the last year!) A fall in the price level is termed ‘deflation’ but this has rarely been witnessed

ECONandBIZ.com Chris Freeman B.Sc.ECON PGCE, Head of Economics & Business Studies, St Christopher’s School, Kingdom of Bahrain Inflation Causes of Inflation: –Demand-Pull – where aggregate demand (AD) rises at a faster rate than aggregate supply (AS) –Cost-Push inflation – increases in costs (labour, raw materials, imported costs, etc.) that cause a leftward and upward shift in AS Price Level RNO Price Level RNO Demand PullCost Push Class Task: Complete the diagrams

ECONandBIZ.com Chris Freeman B.Sc.ECON PGCE, Head of Economics & Business Studies, St Christopher’s School, Kingdom of Bahrain The effects of Inflation Can be good or bad depending on who you are and your current situation Seriousness of the effect depends on the extent to which the inflation is anticipated – Menu costs – the cost of having to change prices – vending machines, labels, etc. – Wealth costs – inflation affects those on fixed incomes and redirects wealth to those in strong bargaining positions or with physical assets – Planning costs – businesses uncertain about future price changes may be reluctant to invest – hits economic growth – Competitiveness – inflation at a higher rate in the UK than elsewhere hits domestic competitiveness and affects the balance of payments – Social Stability - At very high rates, confidence in the currency is eroded and production and exchange can be stifled – can lead to food riots, looting and violence

ECONandBIZ.com Chris Freeman B.Sc.ECON PGCE, Head of Economics & Business Studies, St Christopher’s School, Kingdom of Bahrain How can we define Unemployment Various definitions: – The number of people of working age who are without a job – The Claimant Count – those actively seeking work and claiming benefit – ILO measure: (International Labour Organisation) – the number of people available for work and actively seeking employment

ECONandBIZ.com Chris Freeman B.Sc.ECON PGCE, Head of Economics & Business Studies, St Christopher’s School, Kingdom of Bahrain Unemployment Causes of unemployment: – Frictional Unemployment: where people become unemployed between jobs – Demand Deficient Unemployment: where AD is less than AS – Technological Unemployment – caused where people are put out of work by changes in technology – Seasonal Unemployment – caused by the seasonal nature of some types of employment – e.g. holiday resorts – Real Wage or Classical Unemployment – caused by wage rates being held above market clearing levels – Structural Unemployment – caused by changes to the structure of industry in the economy – e.g. the decline of the coal, iron and steel industries

ECONandBIZ.com Chris Freeman B.Sc.ECON PGCE, Head of Economics & Business Studies, St Christopher’s School, Kingdom of Bahrain Unemployment on a Keynesian LRAS/AD Class Task: Complete the diagram

ECONandBIZ.com Chris Freeman B.Sc.ECON PGCE, Head of Economics & Business Studies, St Christopher’s School, Kingdom of Bahrain The costs of Unemployment To the economy: – Lower tax revenues – Higher benefit payments – Social costs: crime, vandalism, family breakdowns and social welfare support, regional decay – Opportunity cost of lost potential output To the individual: –De-skilling –Loss of self-esteem –Lower income – reduced purchasing power and lower standard of living –Effects on the family unit –Increase in likelihood of stress related illnesses and mental breakdown

ECONandBIZ.com Chris Freeman B.Sc.ECON PGCE, Head of Economics & Business Studies, St Christopher’s School, Kingdom of Bahrain Balance of Payments Measures economic transactions between UK residents and the rest of the world: – Trade in goods – Trade in services – Income flows from investments – Financial flows – shares, loans – Foreign aid International competitiveness

ECONandBIZ.com Chris Freeman B.Sc.ECON PGCE, Head of Economics & Business Studies, St Christopher’s School, Kingdom of Bahrain Graphical view of the Balance of Payments Class Task: Complete the diagram

ECONandBIZ.com Chris Freeman B.Sc.ECON PGCE, Head of Economics & Business Studies, St Christopher’s School, Kingdom of Bahrain Exchange Rates The effect on international competitiveness and BOP Link to the Marshall Lerner Condition and the J-Curve The price of one currency in terms of another – the amount of one currency that has to be given up to purchase another currency Exchange rates determined by the demand and supply of a currency on foreign exchange markets Demand determined by the purchase of exports, supply by the purchase of imports Types of exchange rate system – Floating – Dirty or managed – Fixed exchange rate e.g. Gold Standard or EMU – Adjustable peg system e.g. Chinese Yuan

ECONandBIZ.com Chris Freeman B.Sc.ECON PGCE, Head of Economics & Business Studies, St Christopher’s School, Kingdom of Bahrain Modelling exchange rates Class Task: Complete the diagram

ECONandBIZ.com Chris Freeman B.Sc.ECON PGCE, Head of Economics & Business Studies, St Christopher’s School, Kingdom of Bahrain Other measures of economic performance Social and infrastructure – Infrastructure – Education – Hospitals/Health – Water/Sewerage – Housing Environment – Pollution – Waste – Natural beauty – Planning and Land Use Taxation & Distribution – Tax Burden – Tax Incentives – Income and wealth distribution Quality of life – Material wealth – Mental state – Stress – Crime